Alberta, the province with Canada’s highest GDP per capita, intends to remain part of the country. This, together with hawkish comments from the central bank governor, has boosted the Canadian dollar’s appeal. How long will the USD/CAD pair decline? Let’s examine these factors and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Canada has preserved its territorial integrity.
- The BoC is on the verge of tightening monetary policy.
- Canadian oil is highly valued in Asia.
- Consider adding to long trades once the USD/CAD pair breaks through 1.4045 and 1.4075.
Weekly Fundamental Forecast for Canadian Dollar
The Bank of Canada is expected to raise interest rates for the first time in more than three years, despite lower-than-expected inflation and economic challenges caused by the trade war with the US. Expectations of a new rate-hiking cycle, along with Alberta’s vote to remain part of Canada, drove USD/CAD to a five-week low. In Alberta, which has the highest GDP per capita among Canadian provinces, 76% voted against secession. The news helped the loonie post its biggest one-day gain since early September.
Canadian Dollar Movement
Source: Bloomberg.
Since Kevin Warsh became Fed Chair, the Fed has emphasized a data-dependent approach, but markets still take their cues from central bank officials’ comments. US economic data suggest that the Fed should raise rates as early as October, yet FOMC members are signaling a pause, and investors are taking them at their word. Meanwhile, the Bank of Canada is preparing markets for higher rates, even though the data suggest it would be more prudent to keep the overnight rate at 2.25%.
A central bank needs to explain why it plans to start raising interest rates. Tiff Macklem argues that high oil prices are supporting Canada’s economy, while the conflict in the Middle East could push inflation higher. He says a 25-basis-point hike now could prevent the need for a 50-basis-point increase at the next meeting. These hawkish comments have lifted the market-implied probability of an October rate hike from 30–35% to 80%, pushing USD/CAD lower.
Oil Imports Into Asia
Source: Bloomberg.
Demand for Canadian oil is strong. Shipments to South Korea are selling at a $9.50-per-barrel premium to high-grade Dubai crude, while China is willing to pay $14 per barrel above Brent. The main constraint is limited supply. Mark Carney plans to build more pipelines to reduce Canada’s dependence on the US, which takes up to 90% of Canadian oil exports at a discount of $28 per barrel to WTI.
The approaching midterm elections are also weighing on USD/CAD. Donald Trump has softened his stance, lifting several tariffs on Canadian goods, while US officials have discussed resuming trade talks with Ottawa. However, Trump is likely to return to his tougher stance once the elections are over.
The Bank of Canada is unlikely to signal further rate hikes, as aggressive tightening would hurt the economy. The Canadian dollar could therefore see a classic “buy the rumor, sell the fact” reaction.
Weekly USDCAD Trading Plan
Taken together, these factors create an opportunity to buy USD/CAD on pullbacks. The bounce off 1.4000 offered an entry point for long positions. Once the price breaks above 1.4045 and then 1.4075, one may add to those positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of USDCAD in real time mode
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